Little surprise perhaps, that the Bank of England’s Monetary Policy Committee has today announced that it has decided to hike UK base rate by a further 0.5% to 3.5% – the highest level since October 2008. Notably, 2 members of the MPC committee voted to retain rates at 3%. Their challenge to bring inflation closer to the 2% target is a big one and this is the only tool at their disposal. But with recession looming and the economy and households struggling with the cost of living crisis, today’s rate hike is likely to add more pressure to already hard-pressed families and businesses.
What does today’s interest rate rise mean for investors? Investment experts have been sharing their thoughts with Wealth DFM as follows:
Marcus Brookes, chief investment officer at Quilter Investors: comments: “Despite it being widely acknowledged that the UK is in recession, the Bank of England has today delivered another interest rate rise as it seeks to tame the inflationary beast. For now the 75bps rise in November looks to have been a one off as today brought an additional 50bps to the bank’s rate. The good news for households and the economy is that it looks like inflation may have peaked, if this week’s stats are anything to judge by. This does not mean the end of the rate hikes though, and just like the Federal Reserve over in America, the BoE will keep hiking until it is sure inflation is on a sustained downward trajectory.
“However, with the political shenanigans seemingly over for now and the market a lot more stable than it was at the last decision, investors will start looking to the future and signs of a pause in the hiking cycle and potentially even look at when rates might even be cut in order to stimulate economic growth. The robust jobs market is the only thing keeping the UK from entering a truly stagflationary environment, but how long this will hold remains to be seen. 2023 has not been primed as a bounce back year for the economy, so the BoE may need to act sooner than it may like.
“It is a tough balancing act, and the BoE will be hoping to learn a lot from the US given they appear a few months ahead of the UK in this battle against inflation.”
Edward Hutchings, Head of Rates at Aviva Investors said: “The Bank of England duly delivered on financial markets expectations of a 0.50% hike. With a 3-way split vote, it seems there is still much uncertainty amongst MPC members. However, the Minutes state that the BoE do expect a recession for a ‘prolonged period’! After its recent bullish run, Sterling strength could be somewhat more questionable from here and with further Quantitative Tightening to come plus a staggering amount of Gilt issuance, 2023 will continue to be volatile for the UK Gilt market”
Giles Coghlan, Chief Market Analyst, HYCM, said: “After a year of successive interest rate hikes and soaring inflation, today’s decision from the Bank of England has not come as a surprise to economists or the markets, both of which had fully priced in another 50bps increase. While yesterday’s CPI reading provided some respite to the economy, the cost-of-living grinds on and a print of 10.7% hardly constitutes a Christmas miracle. “At its last meeting, the central bank projected a five-quarter recession, and with the Autumn statement out of the way, fiscal conservatism is the BoE’s modus operandi. The UK is ultimately heading towards stagflation and a deep recession – especially if energy prices surge again once the Russian oil price cap and crude oil embargoes take place. “The Federal Reserve signalled a tougher approach on inflation last night, with rates expected to climb above 5% in 2023. This has given the USD reason for strength, which should pressure the GBP in the near-term – so, today’s bleak outlook from the GBP could sink the GBPUSD lower. Once again, the focus remains on inflation for central banks to slow their pace of hiking.” —
